09-3583-cv

United States Court of Appeals for the

Second Circuit

SECURITIES AND EXCHANGE COMMISSION,

Plaintiff,

STEVEN BYERS, WEXTRUST CAPITAL, LLC, WEXTRUST EQUITY PARTNERS, LLC, WEXTRUST

DEVELOPMENT GROUP, LLC, WEXTRUST SECURITIES, LLC, AXELA HOSPITALITY, LLC, ELKA SHERESHEVSKY,

Defendants,

(For Continuation of Caption See Inside Cover) _______________________________

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK

BRIEF FOR RECEIVER-APPELLEE TIMOTHY J. COLEMAN

TIMOTHY J. COLEMAN

MARK S. RADKE JOHN K. WARREN Attorneys for Receiver-Appellee

Timothy J. Coleman DEWEY & LEBOEUF LLP 1101 New York Avenue NW Washington, DC 20005 (202) 346-8000

JOSEPH SHERESHEVSKY,

Third-Party-Plaintiff,

AVROHOM SHERESHEVSKY, HOLMES REVOCABLE TRUST,

Intervenors-Defendants,

TIMOTHY J. COLEMAN,

Receiver-Appellee,

– v. –

MARTIN MALEK,

Claimant-Appellant,

SPACE PARK ISSB PARTNERSHIP,

Interested-Party,

TCF NATIONAL BANK, REGIONS BANK,

Movant-Appellant,

SPACE PARK AIM PARTNERSHIP,

Movant,

AMNON COHEN,

Third-Party-Defendant.

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RULE 26.1 DISCLOSURE STATEMENT

Pursuant to Rule 26.1 of the Federal Rules of Appellate Procedure,

Receiver-Appellee Timothy J. Coleman, as Receiver for the Wextrust Entities and

Affiliates (the “Receiver”) hereby states: the Receiver is not a corporate entity, but

instead acts as the court-appointed equity receiver for Defendants Wextrust Capital,

LLC; Wextrust Equity Partners, LLC; Wextrust Development Group, LLC;

Wextrust Securities, LLC; and Axela Hospitality, Inc. (collectively, the “Wextrust

Entities”) and entities owned or controlled by the Wextrust Entities (collectively,

the “Wextrust Affiliates”). The Wextrust Entities either control or have ownership

interests in over 240 legal entities located in the United States, Israel, and Africa.

Exhibit A to the district court’s August 11, 2008 Order Appointing Temporary

Receiver (A. 148-55), which was incorporated by reference as Exhibit A to the

district court’s October 24, 2008 Order on Consent Imposing Preliminary

Injunction (A. 667-73), lists the known entities and affiliates falling within the

receivership estate. Given the numerosity of the Wextrust Affiliates and the fact

that they are included in the Joint Appendix, they are not reprinted here. The

Receiver will supplement this disclosure if additional affiliated entities are

discovered during the pendency of this appeal.

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TABLE OF CONTENTS

Page

PRELIMINARY STATEMENT ............................................................................1

COUNTERSTATEMENT OF ISSUES.................................................................5

STATEMENT OF FACTS......................................................................................5

I. THE WEXTRUST FRAUD...............................................................................5

II. THE WEXTRUST COMMODITY FUNDS.........................................................7

A. Establishment And Intended Management And Operation Of The Wextrust Commodity Funds………………………………...7

B. Discovery Of Mismanagement And Commingling Of The Wextrust Commodity Funds……………………………….12

1. The Receiver’s Investigation…………………………………12

2. The National Futures Association Audit……………………..13

III. PROVISIONAL REMEDIES GRANTED BY THE DISTRICT COURT ..............16

IV. THE WEXTRUST COMMODITY INVESTORS’ MOTION TO INTERVENE.....18

V. THE PLAN OF DISTRIBUTION ....................................................................19

STANDARD OF REVIEW ...................................................................................23

ARGUMENT..........................................................................................................27

I. THE DISTRICT COURT DID NOT EXCEED ITS EQUITABLE AUTHORITY IN APPROVING THE RECEIVER’S PLAN................................27

A. Applicable Legal Standards………………………………………..27

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B. Discussion………………………………………………………….30

1. Malek Did Not Challenge The District Court’s Authority To Approve The Receiver’s Plan, And Therefore Forfeited That Challenge………………………….30

2. The District Court’s Conclusion That Its Equitable Authority Extended To Approving A Liquidation Of The Receivership Estate Was Not Erroneous……………..31

II. THE DISTRICT COURT DID NOT ABUSE ITS DISCRETION IN APPROVING THE RECEIVER’S PLAN .........................................................38

A. Applicable Legal Standards………………………………………..38

B. Discussion………………………………………………………….40

1. A Pro Rata Distribution Plan Was An Appropriate Remedy In This Case…………………………...40

2. The Distribution Order Satisfied This Court’s Criteria For Approving A Pro Rata Distribution……………………...41

i. The District Court’s Finding That The Money In The Wextrust Commodity Funds Was Commingled Was Not Clearly Erroneous……………....41

ii. The District Court’s Finding That The Wextrust Commodity Investors Were “Similarly Situated” To The Remaining Wextrust Investors Was Not Clearly Erroneous…………………………………..46

CONCLUSION.......................................................................................................53

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TABLE OF AUTHORITIES Page(s)

CASES Am. Bd. of Trade, Inc.,

830 F.2d 431 (2d Cir. 1987) .............................................................. 29, 31, 34, 35 Bailey v. Proctor,

160 F.2d 78 (1st Cir. 1947) ..................................................................................38 Bear Stearns Sec. Corp. v. Gredd,

397 B.R. 1 (S.D.N.Y. 2007) .................................................................................44 Burke v. PriceWaterhouseCoopers LLP Long Term Disability Plan,

572 F.3d 76 (2d Cir. 2009) ...................................................................................25 CFTC v. Eustace,

No. 05-2973, 2008 U.S. Dist. LEXIS 11810 (E.D. Pa. Feb. 15, 2008) ...............45 CFTC v. Probber Int’l Equities Corp.,

504 F. Supp. 1154 (S.D.N.Y. 1981) .....................................................................49 CFTC v. Topworth Int’l Ltd.,

205 F.3d 1107 (9th Cir. 1999) ..............................................................................39 Cunningham v. Brown,

265 U.S. 1 (1924) .......................................................................................... 38, 39 Eberhard v. Marcu,

530 F.3d 122 (2d Cir. 2008) .................................................................... 29, 31, 34 Esbitt v. Dutch-American Mercantile Corp.,

335 F.2d 141 (2d Cir. 1964) .................................................................... 29, 31, 35 FDIC v. Bernstein,

786 F. Supp. 170 (E.D.N.Y. 1992).......................................................................27 In re Am. Express Merchs. Litig.,

554 F.3d 300 (2d Cir. 2009) .................................................................................26 In re O’Neil Village Personal Care Corp.,

88 B.R. 76 (Bankr. W.D. Pa. 1988)......................................................................37 In re San Vicente Med. Partners, Ltd.,

962 F.2d 1402 (9th Cir. 1992) ..............................................................................25 Jimenez v. Walker,

458 F.3d 130 (2d Cir 2006) ..................................................................................34

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Lankenau v. Coggeshall, 350 F.2d 61 (2d Cir. 1965) ............................................................................ 29, 35

Liberte Capital Group, LLC v. Capwill, 148 Fed. App’x 426 (6th Cir. 2005) .....................................................................38

Lizardo v. Denny’s, Inc., 270 F.3d 94 (2d Cir. 2001) ...................................................................................46

SEC v. Basic Energy & Affiliated Res., Inc., 273 F.3d 657 (6th Cir. 2001) ................................................................... 24, 28, 38

SEC v. Better Life Club of Am., Inc., 995 F. Supp. 167 (D.D.C. 1998)...........................................................................45

SEC v. Black, 163 F.3d 188 (3d Cir. 1998) .................................................................................25

SEC v. Byers, 592 F. Supp. 2d 532 (S.D.N.Y. 2008) ..................................................................32

SEC v. Byers, 637 F. Supp. 2d 166 (S.D.N.Y. 2009) .......................................................... passim

SEC v. Byers, No. 08-cv-7104, 2009 U.S. Dist. LEXIS 112494 (S.D.N.Y. Dec. 3, 2009) ........21

SEC v. Capital Consultants, LLC, 397 F.3d 733 (9th Cir. 2005) ................................................................................38

SEC v. Credit Bancorp, 290 F.3d 80 (2d Cir. 2002) ........................................................................... passim

SEC v. Credit Bancorp, 386 F.3d 438 (2d Cir. 2004) .................................................................................24

SEC v. Credit Bancorp, No. 99-cv-11395, 2000 U.S. Dist. LEXIS 17171 (S.D.N.Y. Nov. 29, 2000).............................................................................. 49, 52

SEC v. Elliott, 953 F.2d 1560 (11th Cir. 1992) ......................................................... 23, 27, 28, 39

SEC v. First Jersey Sec., Inc., 101 F.3d 1450 (2d Cir. 1996) ...............................................................................27

SEC v. Fischbach Corp., 133 F.3d 170 (2d Cir. 1997) .................................................................................23

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SEC v. Forex Asset Mgmt., 242 F.3d 325 (5th Cir. 2001) ............................................................. 23, 27, 30, 39

SEC v. George, 426 F.3d 786 (6th Cir. 2005) ................................................................................44

SEC v. Hardy, 803 F.2d 1034 (9th Cir. 1986) ................................................................. 27, 28, 29

SEC v. Infinity Group Co., 226 F. App’x 217 (3d Cir. 2007)..........................................................................24

SEC v. Lauer, No. 03-cv-80612, 2009 U.S. Dist. LEXIS 23510 (S.D. Fla. Mar. 25, 2009).......45

SEC v. Lincoln Thrift Ass’n, 577 F.2d 600 (9th Cir. 1978) ................................................................................38

SEC v. Lund, 570 F. Supp. 1397 (C.D. Cal. 1983).....................................................................28

SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082 (2d Cir. 1972) ...............................................................................16

SEC v. S&P Nat’l Corp., 360 F.2d 741 (2d Cir. 1966) .......................................................................... 29, 35

SEC v. Safety Fin. Serv. Inc., 674 F.2d 368 (5th Cir. 1982) ................................................................................27

SEC v. Santa Fe Int’l Corp., 817 F.2d 1018 (2d Cir. 1987) ...............................................................................23

SEC v. Tipco, Inc., 554 F.2d 710 (5th Cir. 1977) ................................................................................38

SEC v. TLC Invs. & Trade Co., 147 F. Supp. 2d 1031 (C.D. Cal. 2001)................................................................36

SEC v. Wang, 944 F.2d 80 (2d Cir. 1991) ............................................................................ 23, 27

SEC v. Wencke, 783 F.2d 829 (9th Cir. 1986) ................................................................................28

Teltronics, Ltd. v. Heyman, 649 F.2d 1236 (7th Cir. 1981) ..............................................................................49

United States v. 13328 & 13324 State Highway 75 N., 89 F.3d 551 (9th Cir. 1996) ........................................................................... 38, 52

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United States v. Durham, 86 F.3d 70 (5th Cir. 1996) ............................................................................. 23, 38

United States v. Jon-T Chems., Inc., 768 F.2d 686 (5th Cir. 1985) ................................................................................26

United States v. Lewis, 517 F.3d 20 (1st Cir. 2002) ..................................................................................26

United States v. Vanguard Inv. Co., 6 F.3d 222 (4th Cir. 1993) ....................................................................................39

Wilson v. Wall, 73 U.S. 83 (1867) .................................................................................................38

STATUTES

15 U.S.C. § 77q(a)(1) (2007) .....................................................................................5 15 U.S.C. § 78j(b) (2007) ..........................................................................................5 18 U.S.C. § 371 (2007) ..............................................................................................6 7 U.S.C. § 21 (2007) ................................................................................................13

RULES

Fed. R. Civ. P. 24 .....................................................................................................18 NFA Compliance Rules 2-2(a), 2-9(a), 2-13(a), 2-29(b)(1), 2-29(b)(2),

2-29(e), 3-1(a), 3-2(a) & (c). ................................................................................14 NFA Registration Rules 206(a) & 208(a)(2)(B)......................................................14

TREATISES

16 Fletcher Cyc. Corp § 7931 (2008) ......................................................................28

Receiver-Appellee Timothy J. Coleman, receiver for Defendants Wextrust

Capital, LLC; Wextrust Equity Partners, LLC; Wextrust Development Group,

LLC; Wextrust Securities, LLC; and Axela Hospitality, Inc. (collectively, the

“Wextrust Entities”) and entities owned or controlled by the Wextrust Entities

(collectively, the “Wextrust Affiliates”), respectfully submits this brief in

opposition to the appeal of Martin Malek from an Order dated July 23, 2009,

approving a plan of distribution of receivership assets (the “Distribution Order”),

entered by the United States District Court for the Southern District of New York

(Chin, J.), and reported at SEC v. Byers, 637 F. Supp. 2d 166 (S.D.N.Y. 2009).1

PRELIMINARY STATEMENT

The Wextrust Entities and Affiliates were involved in a multifaceted Ponzi

scheme in which more than $250 million was obtained from investors through

fraudulent private placements of purportedly exempt securities. This appeal

concerns whether the district court abused its discretion in approving a plan to

distribute the remaining Wextrust assets to victims of the Wextrust fraud.

One such victim, Martin Malek, argues that the Wextrust victims who purchased

securities issued by four Wextrust Affiliates that were involved in commodities

speculation (collectively, the “Wextrust Commodity Funds”) were not part of the 1 Malek’s brief is cited herein as “Br. __,” the Joint Appendix is referred to herein as “A. __,” and the Special Appendix is referred to herein as “SPA __.” District court docket entries in the appellate record are cited herein as “Dkt. No. __.”

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larger Wextrust fraud. The district court rejected Malek’s arguments as

unsupported by the factual record, applicable law, and the balance of the equities.

Malek and certain other Wextrust investors (collectively, the “Wextrust

Commodity Investors”) purchased securities offered by a Wextrust Entity. The

purchasers of those securities were led to believe that the proceeds of the offerings

would be used to fund various commodity pools. Those pools – referred to as

“funds” by Wextrust – were to be managed by a Wextrust Affiliate, Wextrade

Commodity Managers, LLC (“WCM”).2 However, the proceeds were

misappropriated and commingled with the funds of other Wextrust Entities raised

from other Wextrust securities fraud victims. The funds were under the control of

the former CEO and COO of Wextrust, who have been indicted on charges arising

out of the Wextrust fraud.

In August 2008, the district court froze all Wextrust assets at the request of

the SEC, including the Wextrust Commodity Funds, and appointed a receiver.

Certain Wextrust Commodity Investors then moved to intervene in the SEC action.

The district court denied that motion, finding that the movants’ interests were

adequately represented by the SEC and the Receiver, based in part on the fact that

2 Four funds are at issue: WexTrade Principal Protected Fund I, LLC (“WPP Fund”); WexTrade Diversified Futures Fund I, LLC (“WDF Fund”); WexTrade Principal Offshore Fund I, Ltd. (“WPO Fund”); and WexTrade Diversified Offshore Futures Fund I, Ltd. (“WDOF Fund”) (collectively, the “Wextrust Commodity Funds”) (A. 992.)

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the Wextrust Commodity Investors’ position was “no different from that of the

other creditors and victims in this case.” (A. 1154.)

On March 27, 2009, the Receiver filed a proposed plan of distribution

(“Receiver’s Plan”) (A. 1293-1339). The Receiver’s Plan proposed a pro rata

distribution of estate assets, based on findings that Wextrust engaged in systematic

and pervasive commingling of victim funds, and that the victims were similarly

situated with respect to their relationships with Wextrust. The SEC supported the

Receiver’s Plan. (A. 1487-95.) In opposition to the Receiver’s Plan, Malek and

other Wextrust Commodity Investors argued that: (1) they are not similarly

situated to the other Wextrust investors; (2) their funds were segregated and not

commingled with the funds of the other Wextrust victims; (3) Wextrust did not

exercise control over the Wextrust Commodity Funds; and (4) the Wextrust

Commodity Funds were improperly included in the receivership estate.

The district court analyzed and rejected all of those arguments in its

thoroughly reasoned opinion, which followed controlling authority that specifically

sets forth the conditions under which a district court may approve a pro rata

distribution. Among other findings, the district court found that the evidence

“clearly shows that [Defendants] Shereshevsky and Byers exercised control over

the [Wextrust Commodity Funds] and used the Funds as part of one overarching

scheme to defraud investors.” (SPA 31.)

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The district court carefully considered the Receiver’s Plan, as well as

extensive briefing from over 100 interested parties, including Malek and other

Wextrust Commodity Investors; permitted a lengthy hearing and supplemental

briefing; and evaluated an array of potentially viable alternatives, including an

alternative equitable plan of distribution proposed by Malek. The district court

made detailed findings in the Distribution Order, particularly with respect to the

treatment of the Wextrust Commodity Funds, which were fully supported by the

factual record. Accordingly, the Distribution Order was well within the district

court’s equitable discretion, and Malek cannot meet the heavy burden of

demonstrating that Judge Chin abused that discretion.

Malek argues for the first time on appeal that the district court did not have

the authority under the law of this Circuit to approve the Receiver’s Plan. That

argument is not only legally incorrect, but was forfeited as a result of Malek’s

failure to present it to the district court in opposition to the Receiver’s Plan.

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COUNTERSTATEMENT OF ISSUES

1. Did the district court, in its oversight of the receivership, have

authority to approve the Receiver’s Plan?

2. Did the district court abuse its discretion in approving a pro rata

plan of distribution for the assets of the Wextrust receivership estate?

3. Did the district court commit clear error in finding that (a) the

monies in the Wextrust Commodity Funds were “commingled” and that (b) Malek

and the remaining Wextrust Commodity Investors were “similarly situated” to the

remaining Wextrust investors?

STATEMENT OF FACTS

I. The Wextrust Fraud

On August 11, 2008, the SEC filed a civil enforcement action against

Steven Byers, Joseph Shereshevsky, and the Wextrust Entities. The complaint

alleges numerous violations of the Securities Act of 1933, including securities

fraud in violation of 15 U.S.C. § 77q(a)(1) (2007), and the Securities Exchange Act

of 1934, including securities fraud in violation of 15 U.S.C. § 78j(b) (2007).

The complaint seeks injunctive relief, disgorgement, prejudgment interest, and

civil monetary penalties. (See A. 106-42; A. 204-42.)

The SEC has alleged, among other things, that Defendants acted through the

Wextrust Entities and Affiliates to raise money fraudulently in various unregistered

offerings, each of which was purportedly for a particular investment, without

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disclosing that funds raised were commingled for the purpose of paying prior

investors in unrelated offerings; making unauthorized payments on unrelated

commitments; and/or funding the operations of the Wextrust Entities, which were

operating at a deficit. (A. 205.) Wextrust marketed itself as a globally-diversified

private equity firm that specialized in investment opportunities ranging from

commercial and residential real estate ventures to investment banking

opportunities, high yield debt funds, African diamond mines and operations, and

managed futures and commodities funds. (A. 211-13.) All of these investment

offerings, however, were part and parcel of the same pattern of alleged fraud

engaged in by Defendants, which was marked by improper transfers of funds

throughout the entire Wextrust enterprise, without regard to investment type or

corporate formalities. (A. 205.)

On August 8, 2008, the United States Attorney’s Office filed a criminal

complaint against Defendants Byers and Shereshevsky, alleging one count of

conspiracy to commit securities fraud, in violation of 18 U.S.C. § 371 (2007).

On November 10, 2008, those defendants were indicted, and the criminal case is

pending.3

3 By coincidence, Judge Chin was randomly assigned the related criminal case against Defendants Byers and Shereshevsky.

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II. The Wextrust Commodity Funds

A. Establishment And Intended Management And Operation Of The Wextrust Commodity Funds

In September and October 2006, Wextrust Securities LLC conducted

offerings of securities in two domestic Wextrust Commodity Funds – the

WexTrade Principal Protected Fund I, LLC (“WPP Fund”) and WexTrade

Diversified Futures Fund I, LLC (“WDF Fund”). (A. 997.) In June 2007,

Wextrust Securities LLC offered similar investments to non-U.S. investors in the

WexTrade Principal Offshore Fund I, Ltd. (“WPO Fund”) and the WexTrade

Diversified Offshore Futures Fund I, Ltd. (“WDOF Fund”). (Id.) The offering

materials for all four funds bore the logo of Wextrust Capital, LLC – one of the

Defendant Wextrust Entities – on their respective cover pages. (A. 1005; A. 1018;

A. 1030; A. 1044.) Defendant Wextrust Securities, a captive broker dealer that

was used to sell securities for the Wextrust enterprise, was to receive commissions

of up to 3 percent of the equity that it raised. (A. 1070.) The offerings for the four

Wextrust Commodity Funds raised approximately $17 million. (Id.)

The Wextrust Commodity Investors executed subscription documents and an

LLC agreement, and paid funds as consideration for securities issued by the

Wextrust Commodity Funds. The proceeds of those sales of securities were to be

held in escrow pending satisfaction of certain conditions. While in escrow, the

Wextrust Commodity Funds were to provide investors an 8 percent annual return

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on their investment. On September 3, 2007, after Wextrust Securities raised a

combined total of $8 million in equity, the proceeds were released to WCM for

trading. (A. 1070.) WCM managed the Wextrust Commodity Funds. (A. 1000;

A. 1070.) Paul Adrian and Defendant Steven Byers were among the principals of

WCM. (SPA 31.) In turn, another named Defendant Wextrust Entity, Wextrust

Capital, LLC, managed WCM. (A. 1000; A. 1071.) WCM operated out of the

office of Wextrust Capital, LLC in Chicago, Illinois. (A. 1071.) Defendants

Byers and Shereshevsky were both principals of Wextrust Capital, as depicted in

the organizational chart below.

Figure 1 – Management Structure of Wextrust Capital4

4 This figure is excerpted from an organizational chart in the record on page 1 of the Appendix to the First Interim Report of Receiver. (See Dkt. Nos. 88, 90.)

Steve Byers CEO & President

Joseph Shereshevsky COO

Investment Banking

Commodity Fund Management

Paul Adrian Fund Manager

Susan Reyes Fund Analyst

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The Wextrust Commodity Funds traded collectively through a “master-

feeder” structure. WCM allocated, for trading, a certain percentage of the offering

proceeds of each of the four funds. Those funds were fed up to a “master fund”

known as WexTrade Master Fund I, Ltd. (“Master Fund”). WCM then

apportioned the money held in the Master Fund to individual commodity trading

advisors, who speculated in commodity futures, including energy, metals, grains,

and meats; U.S. currency and foreign exchange; interest rate related products; and

global equity indices. (A. 1000.) WCM monitored the performance of the

commodity trading advisors and made decisions about portfolio risk. (A. 1071.)

WCM transferred offering proceeds to the Master Fund sufficient to met

margin requirements for its Futures Commission Merchant. The proceeds that

were not transferred remained in interest bearing accounts. The master-feeding

trading structure in the Master Fund mixed funds from the WDF and WPP funds

with the WDOF and WPO funds. (A. 1388.) Allocated profits were then sent

from the Master Fund back to the four funds after trading, as demonstrated in the

chart below:

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Figure 2 – Master-Feeder Structure5

In the figure above, the arrows running from the Wextrust Commodity

Investors to the four Wextrust Commodity Funds indicate dollars intended to be

invested in those funds. The arrows running back from the four Wextrust

Commodity Funds to the Wextrust Commodity Investors indicate non-voting

shares, which were received by the Wextrust Commodity Investors in exchange for

their investments. The arrows running from WCM to the four Wextrust

Commodity Funds and the Master Fund indicate WCM’s position as manager of 5 This figure has been adapted from a chart in the record illustrating the master feeder structure. A variation of this chart was originally included in the offering materials for the WPP and WDF Funds, and attached as Exhibits A and B to the Declaration of Nancy M. Riley, which are included in the Joint Appendix. (See A. 1014; A. 1027.)

Wextrust Commodity

Investors

WPP Fund

WDF Fund

WPO Fund

WDOF Fund

Trading Company

Master Fund

Wextrust Capital LLC

Manager WCM

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those entities. Finally, the arrow running from Wextrust Capital, LLC to WCM

indicates Wextrust Capital’s position as manager of WCM.

On August 11, 2008, the district court granted the Receiver authority over

“the Defendant Wextrust Entities and all entities they control or in which they have

an ownership interest, including but not limited to, those entities listed on Exhibit

A . . . .” (A. 145.) Exhibit A includes each of the Wextrust Commodity Funds.

(A. 671-72.) Shortly after the Receiver was appointed, WCM’s designated Futures

Commission Merchant notified the former manager of WCM that it should

liquidate all trading positions in the Wextrust Commodity Funds. The positions

were liquidated and the Receiver then worked with banks and clearing firms to

freeze all of the assets pursuant to the district court’s freeze order.6 (A. 1071.)

6 Malek’s accusation that the Receiver “created victims” by “seizing assets” (Br. 1) to pay for professional fees is baseless. The record reflects that the Wextrust Commodity Funds were properly included within the estate from the inception of the receivership, the tasks undertaken and results achieved by the Receiver and his advisors have been substantial, the Receiver’s professional advisors have taken discounts from their regular rates and base lodestars for the engagement, there has been a substantial reduction in professional fees since the inception of the case, the SEC has supported each of the Receiver’s interim fee requests, and the district court has considered and overruled all objections to the Receiver’s past six fee applications. (See A. 1808-26; A. 1865-68.)

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B. Discovery Of Mismanagement And Commingling Of The Wextrust Commodity Funds

1. The Receiver’s Investigation

Shortly after his appointment, the Receiver engaged Deloitte Financial

Advisory Services, LLP (“Deloitte”) to conduct a forensic analysis of the Wextrust

Commodity Funds, including the cash flow for each of the four funds – both prior

to and after escrow was broken and the Wextrust Commodity Funds began trading.

At the conclusion of its analysis, Deloitte determined that the Wextrust

Commodity Funds were commingled with other proceeds invested in unrelated

Wextrust projects that had no relationship to the Wextrust Commodity Funds.

(A. 1073-83.) More specifically, Deloitte concluded that Wextrust Capital used

escrowed funds intended for the Wextrust Commodity Funds for non-commodity

related business before the breaking of escrow, and it frequently misappropriated

money from non-commodity victims to fill the requests of investors seeking to

invest in the Wextrust Commodity Funds after the breaking of escrow. (Id.)

At least $2.5 million of the $11.8 million in the WDF Fund (21 percent of

the total raised) and $0.67 million of the $3.38 million in the WPP Fund

(19 percent of the total raised) came from sources that had no relationship to

investors in these two funds. (A. 1082.) In turn, because of the master-feeder

structure illustrated above, the commingled funds from the WDF and WPP Funds

were then fed up into, and routed back from, the Master Fund, which contained

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funds from all four Wextrust Commodity Funds – including the international

WDOF and WPO Funds. Deloitte concluded that the commingling in the Wextrust

Commodity Funds fit a consistent pattern in which the principals of Wextrust

would illegally and impermissibly transfer money throughout the entire enterprise

without regard to corporate formalities or legal obligations. (Id.)

2. The National Futures Association Audit

On August 12, 2008, one day after the appointment of the Receiver, the

National Futures Association (“NFA”) began an on-site audit of the Wextrust

Commodity Funds at Wextrust Capital LLC’s offices in Chicago. (A. 992.)

The NFA is the commodity futures industry’s self-regulatory organization.7

The Receiver and his advisors have worked jointly with the NFA to:

(1) ascertain the status of the Wextrust Commodity Funds; (2) determine the

extent, if any, the Wextrust Commodity Funds were involved in the alleged Ponzi

scheme; and (3) to locate and secure all of the offering proceeds. (A. 992.)

As a result of the NFA’s audit, on May 19, 2009, the NFA filed a formal

complaint against WCM and one of its principals, Paul Adrian. See Complaint,

In re Wextrade Commodity Managers LLC and Paul J. Adrian, NFA Case No.

7 The NFA was formed under Section 17 of the Commodity Exchange Act, 7 U.S.C. § 21 (2007). Section 17 was added to the Commodity Exchange Act by the Commodity Futures Trading Commission Act of 1974, Pub. L. 93-463, 88 Stat. 1389, which provides for the registration and oversight of the NFA by the Commodity Futures Trading Commission (“CFTC”).

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09-BCC-009 (“Complaint”) (A. 1500-14.) Pursuant to NFA rules, the Complaint

is based on the findings of the audit by NFA compliance staff, a report by the

Director of Compliance to the Business Conduct Committee (made up of market

professionals), and the Business Conduct Committee’s independent decision that a

complaint is merited. See NFA Compliance Rules 3-1(a), 3-2(a) & (c). Pursuant

to that process, the NFA Complaint included four counts against WCM and Paul

Adrian, arising from violations of certain CFTC regulations, NFA Compliance

Rules 2-2(a), 2-9(a), 2-13(a), 2-29(b)(1), 2-29(b)(2), 2-29(e), and NFA

Registration Rules 206(a) and 208(a)(2)(B). (See A. 1500-14.)

Based on the findings of the NFA audit, the Complaint alleges numerous

violations of NFA rules. First, the NFA Complaint alleges that Paul Adrian and

WCM violated multiple CFTC and NFA rules and regulations prohibiting the

commingling and/or other misuse of investors’ funds. The NFA audit found that,

during the time that WCM was accepting subscriptions for the Wextrust

Commodity Funds, WCM and its principals commingled funds intended for the

Wextrust Commodity Funds with funds from non-commodity Wextrust Capital

LLC accounts, “and used them in a manner that was not provided for” in the

Wextrust Commodity Funds’ private placement memoranda. (A. 1503-04.)

According to the Complaint, such transfers were in direct “conflict with the pools’

investment strategy and representations made by [WCM and Paul Adrian].”

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(A. 1504.) As a result, the Complaint alleges that WCM and Paul Adrian failed to

disclose the improper uses of these funds. (A. 1507.)

Moreover, the NFA’s audit of the Wextrust Commodity Funds yielded

evidence of intra-fund commingling among the Wextrust Commodity Funds

themselves, in violation of CFTC regulations, NFA rules, and the terms of the

relevant private placement memoranda. (A. 1504.) This type of commingling is

distinct from, and in addition to, the commingling that was discovered by the

Receiver and Deloitte and summarized above.

Next, the NFA Complaint alleges that WCM and Paul Adrian failed to

supervise the Wextrust Commodity Funds properly. (A. 1511.) For example, it

alleges, inter alia, that no WCM supervisory personnel “reviewed and approved

the firm’s promotional material prior to its first use.” (A. 1508.) In addition, the

Complaint alleges that “throughout NFA’s audit of WCM,” Paul Adrian

“was unable to answer many of NFA’s questions and could not provide details

regarding the pools’ operations.” (A. 1509.)

Finally, the Complaint alleges that Paul Adrian and WCM failed to ensure

that WCM complied with NFA requirements regarding the registration of

associated persons and the disclosure of principals. Specifically, Paul Adrian and

WCM did not disclose Defendant Joseph Shereshevsky’s ownership interest in,

and management and control over, the Wextrust Commodity Funds – including the

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crucial fact that Defendant Shereshevsky had signatory authority over the Wextrust

Commodity Funds’ escrow accounts while Paul Adrian did not. (A. 1509.) The

NFA also alleges that Defendant Shereshevsky, a convicted felon, secretly

exercised such a high degree of control over the Wextrust Commodity Funds that

he should have been registered as a principal.8 (Id.)

III. Provisional Remedies Granted By The District Court

Simultaneously with the filing of the complaint in August 2008, the SEC

sought and obtained certain emergency relief. First, the SEC obtained a temporary

restraining order enjoining Defendants from violating the securities laws; ordering

Defendants Byers and Shereshevsky to provide verified accountings for themselves

and for the Wextrust Entities; and prohibiting the destruction, alteration, or

concealment of documents. (Dkt. No. 4.)

Second, the SEC sought and obtained the appointment of a receiver,

pursuant to the federal securities laws and the district court’s equitable authority to

grant ancillary relief. See SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082,

1103-05 (2d Cir. 1972). The initial order appointing a temporary receiver was

subsequently amended on September 11, 2008 (the “Receiver Order”) (A. 647-59.)

Third, the SEC sought and obtained an order freezing all assets (the “Freeze

8 The SEC’s Amended Complaint against Defendants Byers and Shereshevsky also alleges that they “failed to disclose to investors that Defendant Shereshevsky is a convicted felon who pleaded guilty to bank fraud.” (A. 206.)

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Order”) of Byers, Shereshevsky, and the Wextrust Entities, subject to provisions of

the Receiver Order.9 (A. 156-58.)

Finally, on October 24, 2008, the Court issued a preliminary injunction

(the “Preliminary Injunction Order”), continuing the previously granted provisional

remedies, on the consent of all parties to the action. (A. 660-707.) The

Preliminary Injunction Order incorporated the Receiver Order by reference.10

Subject to limited notice requirements, the Receiver is authorized to take

possession and control of all Wextrust assets; to succeed to all rights to manage all

properties owned or controlled by the Wextrust Entities; to pay from available

funds necessary business expenses required to preserve the assets of Wextrust

Entities and Wextrust Affiliates; to engage accountants, attorneys and other

professionals; to take all necessary steps to gain control over and repatriate foreign

assets; to establish a cash management system; to encumber and sell assets; and to

9 On August 28, 2008, upon a motion by the SEC, Defendant Joseph Shereshevsky’s wife, Elka Shereshevsky, was added as a relief defendant and her assets were brought into the receivership estate. (See Dkt. Nos. 20-21.) 10 The relevant Receiver Order directs the Receiver to: (1) preserve the status quo; (2) ascertain the true financial condition of the Wextrust Entities and Wextrust Affiliates, and the disposition of investor funds; (3) determine the extent of commingling of investor funds between Wextrust Entities and Wextrust Affiliates; (4) prevent further dissipation of the assets of Wextrust Entities and Wextrust Affiliates; (5) prevent the encumbrance or disposal of assets of Wextrust Entities, Wextrust Affiliates and investors; (6) preserve the books, records and documents of Wextrust Entities and Wextrust Affiliates; (7) be available to respond to investor inquiries; and (8) determine if the Wextrust Entities and Wextrust Affiliates should undertake a bankruptcy filing. (A. 649-50.)

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commence bankruptcy cases as debtor-in-possession. (A. 650-51.)

Over the past 17 months, the Receiver has managed the assets in the estate.

For example, the Receiver continues to manage both liquid and fixed assets,

including numerous real estate ventures; supervise the remaining Wextrust

employees; and handle numerous ancillary management issues, such as tax,

accounting, insurance, regulatory, and legal matters arising out of the continuing

operation of the Wextrust Entities and Affiliates. The Receiver has filed five

quarterly interim reports detailing the ongoing management and operation of the

estate. (See A. 717-820; A. 1157-1203; A. 1440-86; A. 1715-53; A. 1916-48.)

IV. The Wextrust Commodity Investors’ Motion To Intervene

On December 15, 2008, eight Wextrust Commodity Investors – not

including Malek – moved to intervene, pursuant to Fed. R. Civ. P. 24. On January

30, 2009, the district court ruled that the Receiver and the SEC adequately

represented the Wextrust Commodity Investors’ interests, and that “[t]he position

of the [Wextrust Commodity Investors] is no different from that of the other

creditors and victims in this case.” (A. 1154.) The eight Wextrust Commodity

Investors filed a notice of appeal of the district court’s opinion denying their

motion to intervene on March 2, 2009. (Dkt. No. 203.) Briefing for the appeal,

case no. 09-0840-cv, was complete on July 1, 2009, but the case was subsequently

stayed on November 13, 2009, pending the outcome of this appeal.

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V. The Plan Of Distribution

On March 27, 2009, the Receiver filed a proposed plan of distribution.

(A. 1293-1339.) The Receiver’s Plan proposed a pro rata distribution of estate

assets, based on findings that Wextrust engaged in systematic and pervasive

commingling of victim funds, and that victims were similarly situated with respect

to their relationships with Wextrust. During the six weeks following the filing of

the Receiver’s Plan, more than one hundred Wextrust victims – both investors and

creditors – submitted written statements supporting or objecting to the Receiver’s

Plan. The Receiver submitted a response to all objections and the SEC filed a

statement in support of the Receiver’s Plan on May 11, 2009. (A. 1365-1425;

A. 1487-95.)

On May 21, 2009, the district court held a hearing in which it invited all

interested parties to attend and be heard regarding the Receiver’s Plan. Among the

participants at the hearing were Malek and Harris Kay, the former counsel for

Malek and the eight investors in the Wextrust Commodity Funds who had moved

to intervene. During oral argument, Malek, Kay, and other Wextrust Commodity

Investors and their counsel set forth in detail the arguments presented both at the

district court level and in this appeal that the Wextrust Commodity Funds should

not be included in the receivership estate.

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At the May 21, 2009 hearing, neither Malek nor Kay challenged the district

court’s authority to approve the Receiver’s Plan. Instead, they urged the district

court to use its authority to equitably distribute the assets of the Wextrust

Commodity Funds in a scheme more favorable to the former investors in those

funds. (A. 1537-40; A. 1561-67.)11

Following the hearing on May 21, 2009, Malek, Kay, and the Receiver

submitted supplemental briefs in support of their positions with respect to the

Wextrust Commodity Funds. (See A. 1654-56; A. 1586-93; Dkt. No. 389.) In

Malek’s supplemental submission, he acknowledged that some of the Wextrust

Commodity Fund accounts consisted of “tainted” funds. (Dkt. No. 389 at 17-18.)

In addition, Malek specifically asked the district court to adopt an alternative

“proposed just and equitable distribution of assets” that would result in an outcome

more favorable to him and certain other Wextrust victims. (Id. at 19-21.) Malek

never questioned the district court’s authority to approve an equitable plan of

distribution in this case. Neither did Kay, who submitted a supplemental letter to

the district court dated May 28, 2009 on behalf of a number of investors in the

Wextrust Commodity Funds. (A. 1586-93.) 11 One interested party, TCF National Bank, however, did question the propriety of approving an equitable plan of distribution, and sought for the district court to reconsider its ruling regarding whether to put the assets of the estate into bankruptcy. (A. 1552-53.) Neither Malek nor Kay joined in this argument. In response, the district court stated that the issue had already been decided and was already the subject of a pending appeal. (A. 1553.)

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The district court approved the Receiver’s Plan on July 23, 2009, in an

opinion reported at SEC v. Byers, 637 F. Supp. 2d 166 (S.D.N.Y. 2009)

(hereinafter “Distribution Order”) (SPA 1-44). In the Distribution Order, the

district court expressly found that Malek and other investors in the Wextrust

Commodity Funds were similarly situated to the remaining Wextrust investors and

that the funds in the Wextrust Commodity Funds were commingled with other

Wextrust funds. Based on those findings, the district court agreed with the

Receiver and the SEC that the assets of the estate should be distributed on a

pro rata basis to all Wextrust victims. (SPA 33.)

Despite over one hundred objections to the Receiver’s Plan and several

hundred initial claims disputes, all disputed claims have now been resolved by the

district court pursuant to a December 3, 2009 order, which followed a claims

adjudication hearing held on September 24, 2009. See SEC v. Byers, No. 08-cv-

7104, 2009 U.S. Dist. LEXIS 112494 (S.D.N.Y. Dec. 3, 2009). Participating at the

September hearing was Malek, who argued that he should be entitled to profits

under the Distribution Order. (A. 1839-43.) This claim was denied. (A. 1843.)

Malek is the sole appellant challenging the Distribution Order in this

appeal.12 Although Malek has not sought an expedited appeal, he filed a motion to

12 Since the consolidation of the original appeal, all other appellants – TCF National Bank, Space Park AIM and ISSB Partnerships, and Regions Bank – have

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stay the distribution of assets in the district court on November 3, 2009 – over 14

weeks after entry of the Distribution Order and 5 weeks after Malek participated in

person at the September claims adjudication hearing. The district court denied

Malek’s stay request in an opinion dated December 3, 2009 (Dkt. No. 580), finding

that “[i]t would be inequitable to delay recovery for thousands of investors for the

benefit of one investor – especially when Malek’s likelihood of success on appeal

is low.” (Id. at 4.) After his stay request was denied, Malek then waited almost a

month, until December 31, 2009, to file an “emergency” motion in this Court

seeking a stay of the distribution. That motion was granted on an interim basis

while a panel of this Court evaluates Malek’s request. The motion remains

pending as of the date of this brief.

withdrawn their appeals and have stated that they will not continue to challenge the Distribution Order. (See Dkt. Nos. 526, 564, 587.)

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STANDARD OF REVIEW

This Court reviews a district court’s “decision relating to the choice of

distribution plan for a receivership estate for abuse of discretion.” SEC v. Credit

Bancorp, 290 F.3d 80, 87 (2d Cir. 2002) (“Credit Bancorp I”); see also SEC v.

Fischbach Corp., 133 F.3d 170, 175 (2d Cir. 1997) (“[I]t remains within the

court’s discretion to determine how and to whom the money will be distributed,

and the district court’s distribution plan will not be disturbed on appeal unless that

discretion has been abused.”). Because the Distribution Order was a form of

equitable relief, appellate review is highly deferential. SEC v. Santa Fe Int’l

Corp., 817 F.2d 1018, 1020 (2d Cir. 1987) (“According to the Supreme Court, ‘in

shaping equity decrees, [a] trial court is vested with broad discretionary power;

appellate review is correspondingly narrow.’” (citation omitted)); SEC v. Wang,

944 F.2d 80, 85 (2d Cir. 1991) (stating that the trial court is vested with “broad

discretionary power . . . to craft an equitable decree” and that this discretion

“narrows the scope of appellate review”).13

13 There is consensus among the circuits that district courts have broad discretion to approve plans of distribution in securities and commodities fraud cases. See, e.g., United States v. Durham, 86 F.3d 70, 73 (5th Cir. 1996) (stating that it would “review the lower court’s imposition of an equitable remedy for abuse of discretion” and finding that a court is “not obliged to apply tracing” fictions, even when tracing is permissible); SEC v. Forex Asset Mgmt., 242 F.3d 325, 331 (5th Cir. 2001) (“[W]e analyze the district court’s decision to approve the Receiver’s distribution plan for an abuse of discretion . . . .”); SEC v. Elliott, 953 F.2d 1560, 1566 (11th Cir. 1992) (“The district court has broad powers and wide

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In exercising its equitable discretion, the district court followed this Court’s

holding that the approval of a pro rata plan of distribution in a fraud case is within

the district court’s discretion when “the funds of the defrauded victims were

commingled and where victims were similarly situated with respect to their

relationship to the defrauders.” Credit Bancorp I, 290 F.3d at 88-89. The district

court’s decision to approve the Receiver’s Plan was based on its specific and

detailed factual findings that the funds of Wextrust victims were commingled, and

that the victims were similarly situated with respect to their relationships to

Wextrust. Those factual determinations are reviewed for clear error. SEC v.

Credit Bancorp, 386 F.3d 438, 447 n.10 (2d Cir. 2004) (providing that “[t]his

Court reviews the district court’s factual findings for clear error”).

Malek’s proposed standard of review is incorrect and unsupportable.

Malek argues that the Court should apply a heightened standard of review in this

case, based on his claim that the district court did not have authority to include the

Wextrust Commodity Fund assets in the Distribution Order or to order a

liquidation of the Wextrust receivership estate. Contrary to the overwhelming

weight of authority for the application of an abuse of discretion standard, he argues

discretion to determine relief in an equity receivership.”); SEC v. Infinity Group Co., 226 F. App’x 217, 218 (3d Cir. 2007) (“District Courts have wide equitable discretion in fashioning distribution plans in receivership proceedings, and we review the District Court’s order only for abuse of that discretion.”); SEC v. Basic Energy & Affiliated Res., Inc., 273 F.3d 657, 668-71 (6th Cir. 2001) (same).

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that the district court’s approval of the Receiver’s Plan should be reviewed de

novo. (Br. 21-22.) There is no legal basis for Malek’s argument.

Malek’s reliance on Credit Bancorp I, 290 F.3d at 87, and SEC v. Black, 163

F.3d 188, 195 (3d Cir. 1998), does not withstand scrutiny. In each of those cases,

the court applied the de novo standard of review to the district court’s denial of a

motion for summary judgment, not to the approval of a plan of distribution.

The other authorities Malek cites are similarly inapposite. See Burke v.

PriceWaterhouseCoopers LLP Long Term Disability Plan, 572 F.3d 76 (2d Cir.

2009) (per curiam) (applying de novo review to dismissal of employee benefits

action as time-barred, based on stipulated record); In re San Vicente Med.

Partners, Ltd., 962 F.2d 1402 (9th Cir. 1992) (applying clear error review to

finding that assets were included in receivership estate, abuse of discretion

standard to award of fees to receiver, and de novo review to due process challenge

to assertion of quasi in rem jurisdiction over assets of nonparty and California law

challenge to allocation of receivership expenses). In this case, the only order under

review is the Distribution Order, which is quintessentially a “choice of distribution

plan” reviewable under the abuse of discretion standard. 290 F.3d at 87.

Malek also misstates the standard of review for the district court’s factual

determinations. He claims that the district court’s findings that the Wextrust

Commodity Funds were commingled with other Wextrust assets, and that the

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Wextrust Commodity Investors were similarly situated to the other Wextrust

victims, are reviewed for abuse of discretion. (Br. 22.) As the district court’s

opinion makes clear, those findings were based primarily on fact-intensive

inquiries, including the district court’s review of evidence concerning specific

transactions recorded in Wextrust financial records, and the activities of

Defendants Byers and Shereshevsky in connection with the Wextrust Commodity

Funds. (See SPA 26-33.) Because the district court’s findings were predominantly

factual rather than legal, they should be reviewed under the clearly erroneous

standard. See In re Am. Express Merchs. Litig., 554 F.3d 300, 316 n.11 (2d Cir.

2009) (predominantly factual findings reviewed under the clearly erroneous

standard); United States v. Lewis, 517 F.3d 20, 24 (1st Cir. 2002) (“The fact-

intensive inquiry involved in determining who constitutes a similarly situated

individual belies the defendant’s assertion that the issue is invariably law-

dominated.”); United States v. Jon-T Chems., Inc., 768 F.2d 686, 695 (5th Cir.

1985) (reviewing whether funds were “commingled” as a question of fact subject

to clearly erroneous review).

Regardless of the standard of review applied, the district court’s findings

were factually and legally correct, and the approval of the plan was well within its

broad equitable discretion. Each of Malek’s arguments to the contrary is discussed

below.

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ARGUMENT

I. The District Court Did Not Exceed Its Equitable Authority In Approving The Receiver’s Plan

A. Applicable Legal Standards

This Court and other appellate courts have held consistently that district

courts have broad discretion in supervising equity receiverships and in setting the

procedures for prompt and efficient adjudication and administration of equitable

relief. See, e.g., SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1474 (2d Cir. 1996)

(stating that the district court has “broad equitable power to fashion appropriate

remedies” in securities fraud cases); Wang, 944 F.2d at 85 (stating that the trial

court is vested with “broad discretionary power . . . to craft an equitable decree”);

SEC v. Forex Asset Mgmt., 242 F.3d 325, 331 (5th Cir. 2001) (stating that the

district court enjoys “broad discretionary power” in shaping equity decrees);

SEC v. Safety Fin. Serv. Inc., 674 F.2d 368, 372 (5th Cir. 1982) (noting that there

are “broad powers inherent in a federal court supervising an equity receivership”);

SEC v. Elliott, 953 F.2d 1560, 1566 (11th Cir. 1992) (“The district court has broad

powers and wide discretion to determine relief in an equity receivership.”);

SEC v. Hardy, 803 F.2d 1034, 1037 (9th Cir. 1986) (“The basis for broad

deference to the district court’s supervisory role in equity receiverships arises out

of the fact that most receiverships involve multiple parties and complex

transactions.”); FDIC v. Bernstein, 786 F. Supp. 170, 177 (E.D.N.Y. 1992)

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(stating that “a district court has extremely broad discretion in supervising an

equity receivership and in determining the appropriate procedures to be used in its

administration”).

Furthermore, it is customary for equity receivers to propose plans of

distribution in SEC receivership cases.14 In evaluating competing claims to

receivership property, district courts in SEC receivership proceedings have broad

discretion to employ summary proceedings. See SEC v. Basic Energy & Affiliated

Res., Inc., 273 F.3d 657, 668 (6th Cir. 2001); SEC v. Wencke, 783 F.2d 829, 836-

38 (9th Cir. 1986) (holding that for the claims of nonparties to property claimed by

receivers, summary proceedings satisfy due process so long as there is adequate

notice and opportunity to be heard). Moreover, district courts are entitled to use

summary proceedings in allowing, disallowing, and subordinating the claims of

estate creditors. See Hardy, 803 F.2d at 1037, 1040; Elliott, 953 F.2d at 1566. In

employing such procedures, courts have instructed that “the rights of creditors of a

14 See, e.g., Credit Bancorp I, 290 F.3d at 88-90 (affirming district court’s approval of plan of distribution proposed by receiver); Forex Asset, 242 F.3d at 328 (same); SEC v. Lund, 570 F. Supp. 1397, 1404 (C.D. Cal. 1983) (“The receiver . . . is given the task of locating those members of the public who were injured by the illegal activity and to pay each injured party an amount determined . . . to be fair and equitable.”); 16 Fletcher Cyc. Corp § 7931 (2008) (“Upon proper application, notice to the parties, and proof, the court may order distribution of the assets in the hands of a receiver to the parties entitled to receive them.”) (emphasis added).

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receivership must be balanced against the need for expeditious administration of

the receivership.” Hardy, 803 F.2d at 1039.

This Court has stated, in dicta, that an equity receivership should not be used

as a substitute for bankruptcy, and that district courts should exercise caution in

conducting liquidations of defendant entities in SEC civil enforcement actions.

See Eberhard v. Marcu, 530 F.3d 122, 132 (2d Cir. 2008); Am. Bd. of Trade, Inc.,

830 F.2d 431, 438 (2d Cir. 1987) (“ABT”); SEC v. S&P Nat’l Corp., 360 F.2d 741,

750-51 (2d Cir. 1966); Lankenau v. Coggeshall, 350 F.2d 61, 63 (2d Cir. 1965);

Esbitt v. Dutch-American Mercantile Corp., 335 F.2d 141, 143 (2d Cir. 1964).

The Court has never stated categorically that a liquidation should not be conducted

in a receivership. Rather, the Court has instructed the SEC to inform the district

courts of the views it has expressed “before the court embarks on a liquidation

through an equity receivership.” ABT, 830 F.2d at 438. The Court repeatedly has

affirmed district courts’ approvals of liquidations by receivers, see, e.g., Credit

Bancorp I, 290 F.3d at 88-91, and has never reversed a receivership order on the

ground that the district court improperly approved a liquidation. ABT, 830 F.2d at

437.

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B. Discussion

1. Malek Did Not Challenge The District Court’s Authority To Approve The Receiver’s Plan, And Therefore Forfeited That Challenge

Neither Malek nor any of the other Wextrust Commodity Investors

questioned the district court’s authority to approve the Receiver’s Plan in any of

their submissions or during the May 21, 2009 or September 24, 2009 hearings.

(See A. 1342-63; A. 1537-40; A. 1561-67; Dkt. No. 389.) Accordingly, Malek has

forfeited this argument and the Court should decline to consider it here. See Forex

Asset, 242 F.3d at 332 (“[Appellants], however, did not raise this argument in the

district court when they objected to the distribution plan, and therefore this

argument is forfeited.”).

Malek’s failure to raise the issue below was a strategic decision, not

oversight. Malek took a diametrically opposite position when he specifically

requested that the district court approve a plan of distribution that was more

favorable to him. (See Dkt. No. 389 at 19-21.) Now, dissatisfied with the plan of

distribution ultimately adopted by the district court, Malek contradicts his earlier

position by arguing that the district court never had the authority to adopt any plan

of distribution liquidating the receivership estate in the first place.15 The Receiver

15 The district court overruled similar objections from other investors who attempted “to assert a superior claim to the receivership res” in order to try to “recoup their entire investment.” (SPA 21.)

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respectfully submits that the Court should not reward Malek’s shifting strategy by

considering his new argument for the first time on appeal.

2. The District Court’s Conclusion That Its Equitable Authority Extended To Approving A Liquidation Of The Receivership Estate Was Not Erroneous

Malek argues that the Distribution Order must be reversed because district

courts are prohibited from ordering the liquidation of receivership assets.

(Br. 28-34.) Malek misreads this Court’s precedents, which have repeatedly

affirmed district court orders approving liquidation by receivers in SEC

enforcement actions. See, e.g., Credit Bancorp I, 290 F.3d at 88-91; ABT, 830

F.2d at 438; Esbitt, 335 F.2d at 143. Indeed, as noted above, this Court has never

reversed a receivership order on the grounds that the district court improperly

approved a liquidation.

The Court has clearly instructed the SEC to inform the district courts of its

views about liquidation in equity receiverships, and the district court was so

informed in this case. Contrary to Malek’s charge that the “SEC and the Receiver

. . . ignored their responsibilities” to bring those views to the district court’s

attention, (Br. 32), the SEC and the Receiver both informed the district court early

in the case of the opinions expressing such concerns, including Eberhard and ABT,

the cases Malek principally relies upon. Those cases have been cited and

discussed on numerous occasions, by numerous parties, throughout the

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proceedings in this case. (See, e.g., A. 1321; A. 1402; Dkt. No. 82 at 23 n.15; Dkt.

No. 81 at 12-13; Dkt. No. 71 at 8-10.) Even before the Wextrust Commodity

Investors moved to intervene in the case in December 2008, the district court had

already reviewed substantial briefing on those issues in connection with an earlier

opinion. See SEC v. Byers, 592 F. Supp. 2d 532 (S.D.N.Y. 2008) (A. 948-62).16

Not only was the district court informed of this Court’s views, the record

demonstrates that Judge Chin considered on several occasions whether any or all

of the Wextrust Entities or Affiliates should be liquidated in bankruptcy. (See id.;

A. 857-97; A. 1541-43; A. 1549-54; SPA 19-21.) Pursuant to the Receiver Order,

the Receiver made a determination that bankruptcy proceedings should not be

commenced. The Receiver proposed a liquidation of estate assets, on notice to all

parties, in a detailed Plan of Management filed on January 15, 2009. (A. 1120-52.)

Neither Malek nor any other party objected to that proposal. The proposal was

based on the conclusion that liquidation by the Receiver was likely to result in a

greater recovery to all Wextrust victims (including both equity investors and

creditors) than liquidation proceedings under the Bankruptcy Code. Based on the

analysis and recommendations of numerous professional advisors, the Receiver

determined that there was no reasonable likelihood of a successful plan of

16 This decision is currently the subject of a pending appeal that has been fully briefed and argued, and is awaiting decision. (Case Nos. 09-0234-cv (L), 09-0284-cv (CON).)

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reorganization under Chapter 11 of the Bankruptcy Code, and that a liquidation in

bankruptcy would reduce the recovery to victims because the assets of the estate

would likely be sold at a lower price if they were part of a bankruptcy estate, and

because bankruptcy proceedings would increase the cost of administration.

(A. 1139-43.) The district court has approved the liquidation of significant estate

assets on a case-by-case basis, by ruling on motions to confirm sales negotiated by

the Receiver. (See Dkt. Nos. 160-61, 198-200, 202, 219, 244-46, 300-01, 399,

427, 541-42.) In most cases, those motions were granted without objection.

The district court’s conclusion that, “based on the unique facts of this case

. . . my equitable authority extends to approving a liquidation of the receivership

estate” was not erroneous. (SPA 21.) The court articulated four reasons in support

of that conclusion. First, the court noted that it had broad equitable authority to

approve a plan of distribution in a case such as this. (SPA 17.) Second, the court

held that approval of a plan that would liquidate the estate was permissible under

controlling authority, citing Credit Bancorp I, 290 F.3d at 90, and rejected the

argument that dicta in other cases precluded such a plan. (SPA 20-21.) Third, the

court accorded weight to the Receiver’s judgment and deference to the SEC’s

judgment in supporting the plan. (SPA 18-19.) Fourth, the court found that equity

compelled approval of the Receiver’s proposed plan of distribution:

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The only alternative to the liquidation contemplated by the Plan is bankruptcy. The Receiver has considered a bankruptcy filing, and believes it would be inequitable. Although the question is a close one that gives me pause, in the end I agree . . . . Under these circumstances, it would be inequitable to force the case into bankruptcy, where the bankruptcy court would have less flexibility in determining the most equitable approach to distribute assets to victims. The overriding goal of these proceedings should be fairness to the defrauded investors, and forcing this case into bankruptcy would, I believe, be inconsistent with that goal.

(SPA 19-20.)

Those reasons fully support the district court’s conclusion. Malek’s

argument that the district court ran afoul of the holdings in ABT and Eberhard is

meritless. First, each of those cases affirmed the district courts’ receivership

orders. Thus, as the district court observed in this case, the cautionary language in

those opinions about liquidation in receivership is dicta, and is therefore not

controlling. See Jimenez v. Walker, 458 F.3d 130, 143 (2d Cir 2006).

Second, the dicta in ABT at most requires the district court to consider

whether a bankruptcy court would be a better forum for liquidation or other actions

before approving receivership orders. The record demonstrates that the district

court carefully and repeatedly considered those issues before it approved the

Receiver’s Plan.

Third, the circumstances of this case are readily distinguishable from the

facts involved in ABT, Eberhard, and the other Second Circuit cases expressing

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reservations about liquidation in receivership. In those cases, the assets consisted

principally or exclusively of securities. See, e.g., Lankenau, 350 F.2d at 63

(liquidation of assets of a securities broker-dealer); ABT, 830 F.2d at 438

(liquidation of unregistered securities); S&P National Corp., 360 F.2d at 750-51

(liquidation of stock); Esbitt, 335 F.2d at 143 (liquidation of securities trading

company).

The complexity and cost of managing the assets in the Wextrust

receivership estate are far greater than in the case of the securities firms involved

in those cases. For certain properties that were heavily leveraged and produced

little or no income, such as some of the Wextrust hotel and residential assets, the

combination of heavy debt service and lack of revenue resulted in a rapid draining

of assets from the estate. Accordingly, the Receiver obtained the district court’s

permission to dispose of those assets in order to limit the economic damage to the

estate. For other properties, the operating income exceeds debt service and other

expenses, producing cash to defray the cost of the receivership. In order to manage

those properties, the Receiver must negotiate leases, maintain the premises

(e.g., roofing, paving and painting), pay utility bills and manage a variety of other

aspects of a typical commercial real estate operation.

In order to preserve the value of those assets, it was necessary for the

Receiver first to ascertain their value, with reference to conditions prevailing in the

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real estate markets, which have been severely depressed throughout this case.

Thus, “there is such a close connection between the actions necessary for ongoing

oversight of the Receivership’s assets and for liquidation of those assets” that it

was in the best interests of the estate and the victims for the Receiver to liquidate

certain properties promptly, continue to manage other properties pending

liquidation, and at the same time begin to distribute excess assets to victims.

SEC v. TLC Invs. & Trade Co., 147 F. Supp. 2d 1031, 1036 (C.D. Cal. 2001).

The well-reasoned opinion in TLC, which also involved a receivership that

included distressed real estate and a variety of other assets, is particularly

instructive. In that case, the court made a finding that the ongoing management of

certain insolvent entities, as opposed to liquidation, would drain money out of the

estate that could have otherwise been returned to victims. According, the court

authorized the receiver to liquidate those assets. See id. In this case, the Receiver

has disposed of various properties that were unprofitable and were incurring

substantial costs to the estate, including three hotels and numerous residential real

estate projects. The Receiver has continued to manage other properties, including

profitable commercial real estate operations, which have contributed positive cash

flow to the estate. (A. 1935-38.) At the same time, the Receiver is marketing

those properties through an orderly sale process that is expected to achieve

significantly greater recoveries than would distress sales of property in a

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bankruptcy estate. Pending those sales, and the Receiver’s continuing efforts to

recover additional assets, the partial distribution of estate assets would provide

relief for Wextrust victims, many of whom have suffered severe hardship as a

result of the fraud.

Those circumstances fully support the district court’s determination that it

was in the best interests of the victims to order the Receiver to liquidate estate

assets rather than to commence one or more separate liquidation proceedings in

bankruptcy court. Accordingly, not only have this Court and numerous other

courts recognized the need for liquidation by a receiver in appropriate

circumstances, but the circumstances of this case fully support the district court’s

decision to approve a liquidation in equity rather than bankruptcy for the complex

assets at issue. See In re O’Neil Village Personal Care Corp., 88 B.R. 76, 80

(Bankr. W.D. Pa. 1988) (finding that because management would not be returned

to the former principals who had admitted wrongdoing, if a bankruptcy trustee

were to replace the existing equity receiver, it would be “as clear a case of

duplicative effort” as the court could imagine, as the case was “already under the

control of the receiver, appointed and monitored by the learned state court

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judges”). Therefore, the district court’s conclusion that its equitable authority

extended to approving a liquidation of the receivership estate was not erroneous.17

II. The District Court Did Not Abuse Its Discretion In Approving The Receiver’s Plan

A. Applicable Legal Standards

A district court’s exercise of discretion in adopting a plan of distribution is

guided by equitable principles. See United States v. Durham, 86 F.3d 70, 73 (5th

Cir. 1996) (“Sitting in equity, the district court is a ‘court of conscience.’”) (citing

Wilson v. Wall, 73 U.S. 83, 90 (1867)). The federal courts have expressed a strong

preference for pro rata distributions to similarly situated victims, relying on the

equitable maxim that “equality is equity.” See, e.g., Credit Bancorp I, 290 F.3d at

88-89 (collecting cases); United States v. 13328 & 13324 State Highway 75 N.,

89 F.3d 551, 553-54 (9th Cir. 1996) (approving like distributions to similarly

situated parties and citing as authority the original Ponzi scheme case of

Cunningham v. Brown, 265 U.S. 1, 13 (1924)).18

17 A district court’s authority to order liquidation by a federal equity receiver has been affirmed by other appellate courts. See, e.g., SEC v. Capital Consultants, LLC, 397 F.3d 733, 738-39 (9th Cir. 2005); SEC v. Lincoln Thrift Ass’n, 577 F.2d 600, 609 (9th Cir. 1978); SEC v. Tipco, Inc., 554 F.2d 710, 711 (5th Cir. 1977); Bailey v. Proctor, 160 F.2d 78, 81 (1st Cir. 1947). 18 See also Liberte Capital Group, LLC v. Capwill, 148 Fed. App’x 426, 436 (6th Cir. 2005) (affirming pro rata disbursement plan and noting that in two previous cases “the courts rejected a tracing method, even though tracing was clearly possible”); Basic Energy, 273 F.3d at 668 (approving district court’s plan to treat investors “in the same manner” as others because “[a]s the Supreme Court

- 39 -

This Court adopted a clear standard for the use of such pro rata plans of

distribution in Credit Bancorp I. In that case, investors had transferred cash or

securities to a holding company and, in exchange, received a promise of a quarterly

dividend based on profits earned through various arbitrage investments. In fact,

the company was “running a classic Ponzi scheme,” paying “investors a return out

of the assets transferred by later investors.” 290 F.3d at 83. In addition, the

company commingled assets of its investors and “neither segregated customer

deposits nor earmarked a particular customer’s deposited assets to be used to pay

that customer’s custodial dividend.” Id. at 85.

The district court in Credit Bancorp approved the receiver’s proposed pro

rata plan of distribution. The Second Circuit affirmed, holding that a pro rata

approach is favored when: (1) funds of defrauded victims are commingled and

(2) victims are similarly situated with respect to their relationship to the defrauders.

noted in the original Ponzi case, such cases ‘call strongly for the principle that equality is equity’”) (citing Cunningham, 265 U.S. at 13); Forex Asset, 242 F.3d at 328, 332 (affirming pro rata distribution even though some investor funds were not commingled); CFTC v. Topworth Int’l Ltd., 205 F.3d 1107, 1110 (9th Cir. 1999) (approving receiver’s plan that proposed combining multiple entities into one fund “[b]ecause each entity appeared to be the alter ego of the other”); United States v. Vanguard Inv. Co., 6 F.3d 222, 227 (4th Cir. 1993) (approving pro rata distribution although some investors could trace their funds as all investors shared same equitable position); Durham, 86 F. 3d at 73 (affirming pro rata distribution even though money could be traced to particular claimants); Elliott, 953 F.2d at 1570 (affirming district court’s decision to disallow tracing in Ponzi-scheme, holding that all former securities owners “occupied the same legal position” and thus some should not be preferred over others).

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Credit Bancorp I, 290 F.3d at 88-89. Thus, even though the victims of a Ponzi

scheme might have a claim to recover particular assets that were obtained under

false pretenses, such as under a theory of constructive trust or equitable lien, the

district court’s equitable authority extends to ordering a pro rata distribution if the

conditions articulated by this Court in Credit Bancorp I are satisfied. See id. In

this case, the district court had ample support for its findings that those conditions

were met. Those findings were based on extensive evidence, analysis, and

argument presented to the district court. The summary proceedings held by the

district court gave Malek ample opportunity to make written submissions and

present oral argument, and Malek did so. (See, e.g., A. 1342-63; A. 1537-40;

A. 1561-67; Dkt. No. 389.) The evidence before the district court was voluminous,

and it was thoroughly dissected by Malek, other parties, and the district court. The

district court’s factual findings based on that evidence should not be disturbed,

because they were factually supported and not clearly erroneous.

B. Discussion

1. A Pro Rata Distribution Plan Was An Appropriate Remedy In This Case

As the district court observed, this Court and other appellate courts routinely

affirm the approval of pro rata distributions in SEC enforcement actions involving

Ponzi schemes. (SPA 22-23) (collecting cases and finding that case law “is quite

clear that pro rata distributions are the most fair and most favored in receivership

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cases”). Although the district court considered various alternatives to pro rata

distribution, it ultimately concluded that “the alternatives to pro rata distribution

that have been proposed would create unfair results by rewarding certain investors

over others based on arbitrary factors.” (SPA 22.) In light of this Court’s guidance

that pro rata distribution plans are favored in Ponzi scheme cases, the district court

was well within its authority to approve a pro rata plan of distribution here.

2. The Distribution Order Satisfied This Court’s Criteria For Approving A Pro Rata Distribution

As demonstrated below, far from being clearly erroneous, the district court’s

factual findings regarding the commingling in the Wextrust Commodity Funds and

the similarly situated position of the Wextrust Commodity Investors with respect to

the remaining Wextrust investors were well supported by the factual record.

i. The District Court’s Finding That The Money In The Wextrust Commodity Funds Was Commingled Was Not Clearly Erroneous

The district court set forth four independent reasons for finding that the

money in the Wextrust Commodity Funds was commingled, all of which find

strong support in the record. (SPA 26-29.) First, the district court found

persuasive the “multiple instances of commingling” alleged in the NFA’s

complaint against the manager of the Wextrust Commodity Funds, WCM, and one

of its principals, Paul Adrian. (SPA 26-27; see also A. 1500-14.) As detailed

above, the NFA’s investigation into the Wextrust Commodity Funds, which

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discovered “widespread and serious violations,” including the “mishandling of

pool funds,” also yielded evidence of intra-fund commingling among the Wextrust

Commodity Funds themselves, in violation of CFTC regulations, NFA rules, and

the terms of the relevant private placement memoranda.19 (A. 1504.)

Second, the district court relied on the results of the investigation by the

Receiver and Deloitte, which revealed substantial evidence of commingling in the

Wextrust Commodity Funds. More specifically, Deloitte concluded that the

commingling in the Wextrust Commodity Funds fit a consistent pattern, in which

the principals of Wextrust would illegally and impermissibly transfer money

throughout the Wextrust enterprise without regard to corporate formalities or legal

obligations. (A. 1082.)

Third, the district court rejected the argument advanced by Malek that the

money was not commingled because it was “still there” when the SEC commenced

the action. Malek argues that the Wextrust Commodity Funds were “unaffected”

by any fraud and that the money was accounted for at the commencement of the

receivership. (See, e.g, Br. 3, 10, 15.) However, as the district court found,

Malek’s conclusory assertions are unsupported by the factual record:

19 In response, Malek buries in a footnote in his brief (Br. 42 n. 7) an argument that the NFA’s complaint against WCM and Paul Adrian only alleges violations relating to registration and the failure to supervise, ignoring the detailed allegations that the failure to supervise resulted in impermissible commingling among the Wextrust Commodity Funds and unrelated Wextrust investments.

- 43 -

Their argument presumes that the money in Commodity Fund accounts is “their” money, when, in fact, given the commingling that occurred, in all likelihood it includes money transferred from an investor who never had any intention of investing in a commodity fund. The evidence of some commingling in the Commodity Funds suggests that it is merely a coincidence that the Commodity Funds were not commingled as extensively as the Real Estate Funds – and coincidence cannot be a basis to treat the Commodity Funds investors more favorably than the Real Estate investors.

(SPA 28.)

Fourth, the district court found that Malek’s argument that the Wextrust

Commodity Investors thought they were making a “safe and regulated investment”

was irrelevant because, given the facts that came to light during the proceedings, it

was clear that the investments were far from safe. (SPA 29.) Malek argues that

the relevant CFTC and NFA rules and regulations in effect obligated the Wextrust

Commodity Funds’ managers to keep the funds separate (Br. 36-37), yet fails to

address the fundamental flaw in that argument, which is that the Funds were not, in

fact, operated in accordance with any such rules or regulations.

In his self-contradictory effort to find fault with the district court’s rulings,

Malek on one hand argues that there was no commingling because the improper

transactions were “loans” or “isolated transactions” (Br. 46-47), but on the other

hand acknowledges that the Funds were “tainted” (Dkt. No. 389 at 17-18), and that

they were only “minimally” commingled (Br. 44). Despite Malek’s attempt to

- 44 -

characterize the transactions at issue as loans, he cannot escape the fact that they

were fraudulent.

First, the actions of the defrauders to “loan” money back and forth from the

Wextrust Commodity Funds and other unrelated Wextrust investment vehicles

merely delayed the detection of, and further perpetuated, the underlying Wextrust

scheme. See SEC v. George, 426 F.3d 786, 799 (6th Cir. 2005) (“The mere

coincidence that the defendants chose the relief defendants (instead of others) to

receive funds contributed by other investors in order to delay the discovery of this

scheme does not entitle the relief defendants to preferential treatment.”); Bear

Stearns Sec. Corp. v. Gredd, 397 B.R. 1, 13 (S.D.N.Y. 2007) (finding that

improper “loans” or transfers were in furtherance of the underlying fraudulent

scheme and were intended to avoid detection because “the payments . . . were

essential to the continuation of the scheme”). Malek even acknowledges that

commingling would be present where defendants “helped themselves” to the funds

at issue (Br. 49), which is precisely what Wextrust did with the Wextrust

Commodity Funds in improperly diverting their proceeds to fund unrelated

investments and general Wextrust payroll expenses. (A. 1073-83.)

Second, even “minimal” commingling would be sufficient to taint all of the

Wextrust Commodity Funds as they now constitute unsegregatable assets from

many different investors and many different Wextrust offerings. A district court

- 45 -

sitting in equity has broad discretion under the securities laws to place funds under

the control of an equity receiver when those funds are shown to have been tainted

by a defendant’s fraudulent conduct. See, e.g., SEC v. Merrill Scott & Assocs.,

Ltd., 2:02-cv-39, 2006 U.S. Dist. LEXIS 93247, at *17-21 (N.D. Utah Dec. 21,

2006); SEC v. Better Life Club of Am., Inc., 995 F. Supp. 167, 181 (D.D.C. 1998)

(finding that when tainted and non-tainted funds are commingled in an account

controlled by the defendant, the entire account becomes tainted and subject to

pretrial restraint); cf. SEC v. Lauer, No. 03-cv-80612, 2009 U.S. Dist. LEXIS

23510, *15 (S.D. Fla. Mar. 25, 2009) (“The presence of some tainted funds . . . is

sufficient to taint all”) (citations omitted).

In order to prove that the funds were commingled, a court only requires

some evidence of commingling; there need not be evidence that the commingling

was “systematic.” CFTC v. Eustace, No. 05-2973, 2008 U.S. Dist. LEXIS 11810,

at *13 (E.D. Pa. Feb. 15, 2008). The evidence of commingling in the Wextrust

Commodity Funds more than satisfies this standard. As the district court observed,

“there is some evidence that commingling occurred, and the law does not appear to

require more than that.” (SPA 26.)

Finally, Malek’s unsupported assertion that “no Wextrust Defendant was

affiliated with” the Wextrust Commodity Funds (Br. 41) simply ignores the

overwhelming factual record. Defendants Byers and Shereshevsky both had roles

- 46 -

in mismanaging the Wextrust Commodity Funds, and despite their alleged lack of

authorization to control the Wextrust Commodity Funds, they nonetheless exerted

substantial control over them. (SPA 31) (finding that the evidence “clearly shows

that Shereshevsky and Byers exercised control over the Commodity Funds”). As

pointed out by this Court in Credit Bancorp I, 290 F.3d at 90, the return of

particular assets to particular victims is appropriate only when “the assets had

somehow been segregated in the manner of true trust accounts and/or had never

been placed in the defrauder’s control.” (emphasis added). That was clearly not

the situation in this case. Accordingly, the district court’s finding that the Wextrust

Commodity Funds were sufficiently commingled to satisfy the Credit Bancorp I

standard was not clearly erroneous.

ii. The District Court’s Finding That The Wextrust Commodity Investors Were “Similarly Situated” To The Remaining Wextrust Investors Was Not Clearly Erroneous

In finding that Malek and the remaining Wextrust Commodity Investors

were “similarly situated” to the other Wextrust investors, the district court properly

found that the circumstances of all victims “need not be identical.” Rather, the

district court must merely find that there is a “reasonably close resemblance of

facts and circumstances.” (SPA 29) (quoting Lizardo v. Denny’s, Inc., 270 F.3d

94, 101 (2d Cir. 2001)).

The district court found that all of the Wextrust investors were similarly

- 47 -

situated based on five reasons: (1) the common role of Wextrust Capital in all of

the investment funds; (2) the fact that Wextrust characterized all of the investments

as involving a high degree of risk; (3) the fact that Wextrust promoted all of the

investments by highlighting the role of Byers, Shereshevsky and other Wextrust

personnel in managing them; (4) the fact that cash from the investment funds was

pooled to pay for operating expenses and distributions across various offerings;

and (5) the fact that the investments were portrayed as being backed by Wextrust

Capital. (SPA 29-30.) The district court stated in its opinion that it considered the

question of whether the Wextrust Commodity Investors were similarly situated to

be “a much closer call” than whether the real estate fund investors were similarly

situated to one another. Nonetheless, the district court’s factual determination,

based on the record before it, was that this requirement was satisfied with respect

to all Wextrust investors, and that finding should not be disturbed because it was

not clearly erroneous.

The district court carefully examined and rejected Malek’s arguments that

the Wextrust Commodity Investors were not similarly situated to other Wextrust

victims. First, the district court found Malek’s contention that the “commodities

laws circumscribe the Court’s discretion, and prevent it from approving the Plan,”

was “meritless,” because federal courts “regularly appoint receivers and approve

distribution plans in cases involving violations of the federal commodities laws.”

- 48 -

(SPA 30.) The fact that the Wextrust Commodity Funds sold securities for the

purported purpose of speculating in commodities (as opposed to real estate or

diamond mining) does not affect the district court’s discretion to include them in

the receivership estate. Ponzi schemes involving commodities speculation are

scarcely less common than those involving other types of investments.

Second, the district court found equally unpersuasive Malek’s argument that

the Receiver cannot include the Wextrust Commodity Funds within the

receivership estate because he only stands in the shoes of WCM, and therefore

cannot assert a claim WCM would not be able to assert. The district court

explicitly found that this argument was “premised on a misunderstanding of the

Receiver’s role,” because:

The Receiver is charged with protecting the interests of all investors in the Wextrust entities, and he has the authority to assert claims on behalf of any of those entities. Thus the Receiver not only has the authority, but also the duty, to assert claims against the Commodity Funds on behalf of the Real Estate Funds investors whose assets were commingled with the Commodity Funds.

(SPA 32-33.)

In the Credit Bancorp case, the district court rejected nearly identical

arguments:

- 49 -

[The investors] attempt to avoid the import of the case law governing federal equity receiverships by contending that the Receiver merely stands in the shoes of Credit Bancorp. Therefore, the argument goes, the Receiver has no better grounds to prevent them from recovering their securities than would Credit Bancorp and, pursuant to the credit facility agreements, Credit Bancorp would have no such grounds. This argument is another variation on the [investors’] attempt to have their claims considered in isolation from those of the other customers.

SEC v. Credit Bancorp, No. 99-cv-11395, 2000 U.S. Dist. LEXIS 17171, *61

(S.D.N.Y. Nov. 29, 2000). This is precisely the situation here – Malek and the

remaining Wextrust Commodity Investors would prefer to have their claims

considered in isolation from the remaining Wextrust investors, despite clear equity

jurisprudence to the contrary.20 Here, too, the district court properly found that the

Wextrust Commodity Investors are in the same position as the myriad other

victims of the same Wextrust fraud.21

20 Cf. Teltronics, Ltd. v. Heyman, 649 F.2d 1236, 1239 (7th Cir. 1981) (rejecting, under Illinois receivership law, argument that receiver takes no better title to property than person subject to receivership, since receiver is empowered to manage the claims of defrauded rightful owners). 21 The remaining cases cited by Malek are equally inapposite. For example, CFTC v. Probber Int’l Equities Corp., 504 F. Supp. 1154, 1160 (S.D.N.Y. 1981), involved a situation in which an investor requested the return of property in the possession of a Receiver that had been held as collateral by an alleged wrongdoer. In that case, however, the property was held in a series of four safety deposit boxes and consisted of identifiable municipal bonds, cash, and gold coins that were completely segregated in the safety boxes at all times. In stark contrast to the situation in Probber, the Wextrust Commodity Investors’ funds in this case were commingled with the funds of unrelated non-commodity Wextrust investors.

- 50 -

Finally, the district court rejected Malek’s argument that the Wextrust

Commodity Investors were not similarly situated to the remaining Wextrust

investors because the Defendants neither owned nor exercised control over the

Wextrust Commodity Funds. The district court correctly found that this argument

was “belied by the evidence, which clearly shows that Shereshevsky and Byers

exercised control over the Wextrust Commodity Funds, and that they used the

Funds as part of one overarching scheme to defraud investors.” (SPA 31.)

The district court relied on four key facts to support its finding that the

Defendants exercised control over the Commodity Funds. First, Defendant Byers

– as a principal of both WCM (the manager of the Wextrust Commodity Funds)

and Wextrust Capital – had the exclusive right to manage WCM. (Id.) Second,

“Shereshevsky exercised a significant amount of control over the funds, as

evidenced by his ability to have funds transferred back and forth between the Real

Estate and Commodity Funds.” (Id.) Third, “a substantial number of Commodity

Funds investors also invested in Real Estate Funds.” (SPA 31-32; see also

A. 1439.) Fourth, the district court found persuasive a December 5, 2006 Wextrust

Capital press release that refers to the “development of Wextrust Capital’s new

commodity based investment funds.” (SPA 32; see also A. 1433.) Accordingly,

the district court’s finding that the Wextrust Commodity Investors were similarly

situated found considerable support in the factual record. In so finding, the district

- 51 -

court expressly held that the Wextrust Commodity Funds were part of a “unified

scheme to defraud,” and therefore were properly in the receivership and subject to

a pro rata plan of distribution. (SPA 32-33.)

Malek’s remaining arguments are equally unpersuasive. He first argues that

the alleged divergent risk profiles of the Wextrust Commodity Investors in

comparison to the other Wextrust investors mandates preferential treatment in any

distribution (Br. 37). However, equity jurisprudence clearly accords the district

court discretion to approve a pro rata distribution, independent of any

consideration of “level of risk, timing of investment, tracing analysis, or some

other factor.” (SPA 22.)

Malek’s argument that assets should be excluded from a receivership

because the fraudulent enterprise did not have an ownership interest in them (Br.

24-26) has been rejected repeatedly. For example, in the Credit Bancorp case,

victims of a Ponzi scheme similar to the one at issue here attempted to trace and

exclude their purportedly identifiable property on the grounds that applicable law

provided that Credit Bancorp did not have an ownership interest in the assets in

question. This is precisely the argument made by Malek here. (See Br. 25-28.)

The district court in Credit Bancorp, however, found this argument baseless:

- 52 -

Nor does the fact that Credit Bancorp “expressly agreed” and “the applicable law provided” that it would not have an ownership interest in the [investors’] assets distinguish this case. As previously mentioned, the fact that the [investors] might be entitled under other law to recover their assets does not end the inquiry in this equity receivership because equitable concerns may supersede those other rights.

Credit Bancorp, 2000 U.S. Dist. LEXIS at *54. Citing the Ninth Circuit’s

decision in United States v. 13328 & 13324 State Highway 75 N., 89 F.3d

551, 553 (9th Cir. 1996) (“Real Property”), as further support, the court also

held:

In Real Property, the perpetrator of the fraudulent investment scheme posed as an investment advisor . . . Presumably, an agreement with an investment advisor would not provide the advisor with an ownership interest in his customer’s assets – and applicable law would be to the same effect. Yet the [Real Property] court denied the investor’s request to trace his assets.

Id. at *54-55.

Here, the district court expressly dismissed this argument and cited Credit

Bancorp as authority, finding that it was an “almost identical argument.”

(SPA 33.) As in Credit Bancorp and Real Property, it was a proper exercise of the

district court’s equitable discretion to order that the funds obtained from the

Wextrust Commodity Investors, which were raised, used, and commingled as part

of the Wextrust fraud, remain in the receivership estate.

- 53 -

CONCLUSION

For the foregoing reasons, the Receiver respectfully submits that the

judgment of the district court should be affirmed in its entirety, and Malek should

be taxed the costs associated with this appeal.

Dated: January 15, 2010 Respectfully submitted,

Washington, DC DEWEY & LEBOEUF LLP By: _________________________

Timothy J. Coleman, Receiver Mark S. Radke John K. Warren 1101 New York Avenue, NW Washington, DC 20005-4213 Telephone: (202) 346-8000 Facsimile: (202) 346-8102

Attorneys for Receiver-Appellee Timothy J. Coleman

- 54 -

CERTIFICATE OF COMPLIANCE WITH FED. R. APP. P. 32(a)(7)(B)

I, John K. Warren, the attorney of record for Timothy J. Coleman,

Receiver for the Wextrust Entities and Affiliates, do hereby certify that the

foregoing brief complies with the type-volume limitations as set forth in Federal

Rule of Appellate procedure 32(a)(7). The total number of words in the foregoing

brief is 12,825, excluding the parts of the brief exempted by Federal Rule of

Appellate Procedure 32(a)(7)(B)(iii). I make this representation based upon the

word count generated by the word processing software used to prepare this brief.

The font used for this brief is Times New Roman in 14-point type.

Dated: January 15, 2009 __________________________

Washington, DC John K. Warren

STATE OF NEW YORK COUNTY OF NEW YORK

) ) )

ss.:

AFFIDAVIT OF SERVICE BY OVERNIGHT EXPRESS MAIL

I, , being duly sworn, depose and say that deponent is not a party to the action, is over 18 years of age and resides at the address shown above or at

On January 15, 2010 deponent served the within: Brief for Receiver-Appellee Timothy J. Coleman

upon: Jessica Rassler Thomas, Alexander & Forrester LLP Attorneys for Claimant-Appellant Martin Malek 14 27th Avenue Venice, California 90291 (310) 961-2536 jessicarassler@tafattorneys.com the address(es) designated by said attorney(s) for that purpose by depositing 2 true copy(ies) of same, enclosed in a postpaid properly addressed wrapper in a Post Office Official Overnight Express Mail Depository, under the exclusive custody and care of the United States Postal Service, within the State of New York, also by electronic service Via e-mail. Sworn to before me on January 15, 2010 MARIANA BRAYLOVSKAYA Notary Public State of New York

No. 01BR6004935 Qualified in Richmond County

Commission Expires March 30, 2010

Job # 227035

ANTI-VIRUS CERTIFICATION FORM Pursuant to Second Circuit Local Rule 32(a)(1)(E)

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